(Corrects to say dollar rose, but not against euro, in 1st paragraph)
* Global stocks fall on doubts about bailout plan's fate
* Oil prices fall $2 a barrel on slowing global demand
* Dollar climbs from record one-day euro loss as oil falls
* Government debt rises in safe-haven bid, bailout doubts (Adds close of U.S. markets)
By Herbert Lash
NEW YORK, Sept 23 (Reuters) - Uncertainty over the fate of a proposed $700 billion bailout of Wall Street drove down U.S. and European stocks on Tuesday, while the dollar rose on views the plan might not be as negative for the greenback as initially feared.
U.S. and euro-zone government bond prices rose and inter-bank lending rates traded far above central bank target levels as investors worried about the viability of a plan whose final cost and composition are still unknown.
Oil prices fell more than $2 a barrel, reversing Monday's dramatic rally, as dealers focused on slowing global energy demand and doubts over the U.S. bailout plan. Other commodities also tumbled, with copper down 3.2 percent in New York, with profit-taking on the firmer dollar adding pressure.
Credit markets remained tight as U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke testified before Congress. A closely watched gauge showed banks are still reluctant to make loans to each other.
Paulson urged lawmakers to pass legislation quickly to calm markets, but congressional leaders said it would be a mistake to rush such a sweeping bailout into law.
No senator stepped forward with an overt threat to block the plan, but the head of the Senate Banking Committee, Connecticut Democrat Christopher Dodd, said the plan was "not acceptable," although he said Congress could pass a plan if changes are made.
"I just don't think the American public is sold. I think they are skeptical of the need and they are fearful of the cost," David Dietze, chief investment officer at Point View Financial Services in Summit, New Jersey.
"The skepticism is that this is going to help the Wall Street financiers and do nothing for the little guy other than saddle them with a big tax bill," Dietze said.
U.S. stocks fell in a day of sharp volatility, on fears that Congressional wrangling could delay the proposed rescue plan, increasing worries about the struggling U.S. economy.
Lower commodity prices dragged down oil and energy-related companies.
The Dow Jones industrial average <
> closed down 161.52 points, or 1.47 percent, at 10,854.17. The Standard & Poor's 500 Index <.SPX> shed 18.89 points, or 1.56 percent, at 1,188.20. The Nasdaq Composite Index < > slipped 25.64 points, or 1.18 percent, at 2,153.34.General Electric Co <GE.N> was a top drag on the Dow and the S&P, falling 4.6 percent to $24.95, after a Goldman Sachs analyst cut the company's profit outlook and on concerns of the conglomerate's GE Capital finance business.
European shares ended sharply lower for the second straight as investors fretted over the bailout.
The pan-European FTSEurofirst 300 <
> index closed 1.64 percent lower at 1,108.54 points.Banks took the most points off the index, with UBS <UBSN.VX> falling 7.9 percent, and miners also fell sharply, tracking a fall in metal prices. Anglo American <AAL.L> was the most heavily weighted loser on the index, down 8.2 percent.
U.S. elections in November make the bailout a sensitive subject, and politicians will do their utmost to make populist changes, said Emiel van den Heiligenberg, head of asset allocation at Fortis Investments in London.
"We would expect the plan to be accepted, perhaps in a slightly amended form, but stay cautious on markets because of the recession and the impact on earnings," he said.
The dollar climbed from a record one-day loss versus the euro, with investors encouraged by the fall in oil prices. But the euro ended higher against the dollar.
Trading was thin as many investors waited for the market turmoil to subside.
The dollar rose against major currencies, with the U.S. Dollar Index <.DXY> up 0.30 percent at 76.50.
But against the yen, the dollar <JPY=> fell 0.12 percent at 105.28 and the euro <EUR=> rose 0.53 percent at $1.4705.
Bond gains were curbed by concerns over how much such a bailout would cost.
The spread between the borrowing cost on three-month dollar funds in the inter-bank market and the expected three-month rate on benchmark U.S. federal funds widened, signaling banks' unwillingness to part with their cash beyond a week.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose 6/32 to yield 3.83 percent. The 30-year U.S. Treasury bond<US30YT=RR> also gained 6/32 to yield 4.41 percent.
U.S. crude for November <CLc1> settled down $2.76 at $106.61 a barrel, after rising nearly $7 on Monday. November Brent crude <LCOc1> settled down $3.71 at $102.33.
Gold futures ended 2 percent lower, also retreating from the previous session's sharp gains.
December gold <GCZ8> settled down $17.80 at $891.20 an ounce in New York.
Overnight in Asia, stocks fell and U.S. Treasury prices rose on skepticism about Washington's billion bailout plan.
The MSCI index of Asia-Pacific stocks outside of Japan <.MIAPJ0000PUS> slipped 2.2 percent. Japan's market was closed because of a holiday. (Reporting Ellis Mnyandu, Richard Leong and Gertrude Chavez-Dreyfuss in New York and Sitaraman Shankar, Jane Merriman, Alex Lawler and Kirsten Donovan in London; Writing by Herbert Lash; Editing by Leslie Adler)